Entrepreneurs Turn to Home-Based Franchises in Tough Economy

Kwame Tutuh’s days of teaching second grade are over, but on a typical weekday he still arrives at school well before the bell rings. As an Ident-A-Kid franchisee in Fulton County, Georgia, Tutuh now teaches child safety. His business produces identification cards so parents can quickly dispatch the child’s photograph, fingerprints, and description to authorities and get a search underway if a child is abducted or lost. The father of two funded the $50,000 startup costs with a personal loan and launched the franchise in November 2006. In paying the startup costs, Tutuh received extensive training, a laptop computer, digital scale, digital fingerprinting scanner, the Ident-A-Kid software, and an exclusive and protected territory, among other things.

He runs the business from his home office but spends much of his time on the go. His day starts at 8 a.m. taking pictures of children at schools and daycare centers and by 2 p.m. he’s back at home matching photos with fingerprints, height, weight and other back-office tasks. A few weeks later, he produces the cards, sometimes as many as 200 at a time using equipment all in his home office.

Contracting with the schools, thousands of parents eagerly pay Tutuh the nominal fee (less than $10 each) for the sense of security that child identification cards provide. With their support, his Ident-a-Kid business grossed about $89,000 in 2007 and $140,000 in 2008. “I am in the perfect sector,” says the 32-year-old. “The economy can be at its worst but we’re still going to do whatever it takes to protect our children.”

Like Tutuh, increasing numbers of entrepreneurs are finding that they can thrive in an economic downturn in home-based franchises that provide valued services and keep overhead low. The self-sufficient entrepreneurs work in industries as diverse as senior care and interior design, but share a rare form of discipline that allows them to get the job done despite the distractions of home and the lack of manpower common in corporate settings.

Service Sells

Matthew Shay, president of the International Franchise Association, the leading organization of franchisors, franchisees, and suppliers, says the franchise sector will likely see declines in 2009 due to the tightening credit market and recession. However, due to the merits of the franchise model, he expects the sector to out pace others. In general, Shay cites the growth of in-home senior care and health and wellness franchises geared toward the needs of the expanding aging population.

The increase in obesity rates is also spurring new concepts in children’s health services such as gyms and sports organizations dedicated especially to kids, he says. In fact, he expects a handful of industries to thrive because of the economy. “There are some concepts that may see increased opportunities during a slow economy such as handyman and automotive supply services because of an increase in the people who choose to repair their current homes and automobiles instead of purchasing something new,” he says. “Temporary placement services may see an increase in demand as employers look to fill their workforce needs with temporary workers instead of hiring full-time employees.”

Shinda Starr’s Decor & You franchise in Woodbridge, Virginia, has yet to be affected by the downturn. “The clients I have now are people who have been in homes for three to five years and just haven’t had time to decorate,” she says. “They’re staying home more, starting to look around their environment. They want to make home a sanctuary.”

She won the 2007 Decor & You Business Development Award for pushing her business beyond $100,000 in sales–more than double the previous year’s sales. Starr’s startup investment was just $14,000 in 2005 and provided Starr with the tools she needed such as the company’s customized accounting, inventory, and design software; 200 plus hours of training; as well as Web, marketing, and public relations.

Darrell Johnson, president of FRANdata, a franchise research firm, also says residential, personal, and business service providers show strength despite the economic recession. Financial, legal, accounting, and computer support services for small businesses are promising as are youth-oriented franchises such as sports leagues, art programs, childcare, and tutoring.

All of this is good news for people interested in home-based franchises, which are predominantly service businesses. Still, not all services are created equal, and Johnson adds that a key consideration in a down economy is: “To what extent is this brand’s product or service deemed to be necessary versus discretionary? People may still need haircuts when interviewing for jobs in a recession but do they need a $50 cut or $15 cut,” he asks.

Health and Wealth Franchises 

Entrepreneurs hoping to weather economic storms should also consider the healthcare industry. “When the economy is booming people don’t consume more healthcare than they would on average and when the economy is in a recessionary period, people do not necessarily cut on healthcare spending,” says Paul Larson, an equities strategist for Morningstar, a Chicago-based investment research firm. “If you’re looking for an industry that has no economic sensitivity, healthcare has got to be at the top of the list.” A recent FRANdata report found that in-home health concepts are positioned for “excellent sales and revenue growth.”

Al and Adair Voorhees, owners of a Home Helpers franchise in Virginia Beach, Virginia, saw their 2008 revenues jump roughly 20% into the “low six-figures” despite the economy. The 47-year-olds were attracted to the franchise five years ago because of its favorable reviews from current and former franchisees, low startup costs (then about $14,900) and multiple revenue streams. The home healthcare business serves the elderly, those recovering from injury and illness, and new and expectant mothers.

“The impact of the recession in healthcare is far less than it is in other industries,” Voorhees says. “What we see is that when people need care, they are going to pay for it in good times and in bad times.”

Money Matters

Once you’ve found the right franchise, there’s still the question of how to fund it. Increasingly, the answer is a Small Business Administration-backed loan. Despite the downturn, black entrepreneurs received $83 million in SBA 7(a) franchise loans in 2008, up 64% from $51 million in 2004. The figure is particularly striking because SBA 7(a) franchise loans, which tend to be working capital loans, were down 20% overall in 2008. Blacks also obtained $13 million in SBA 504 franchise loans, which are for plant and equipment purchases, in 2008, an 88% increase from 2004.

Grady Hedgespeth, director of the SBA’s office of financial assistance, admits that SBA lending fell off about six months after conventional lending slowed. “When you have such tremendous movement in the overall economy, we aren’t immune to that,” he says. “Certainly, whenever we hit bottom and start coming out the other side [of the recession] it’s likely to be led by SBA lending as banks get back into taking on appropriate risks.”

Hedgespeth says that entrepreneurs planning to apply for SBA loans must have solid business plans that have been stress tested and clearly demonstrate how the needed funds will generate revenue to cover debt. They’ll also need to bring more equity to the table and shop around at smaller community banks and credit unions for loans under $100,000. The SBA Franchise Registry, a list of franchises whose franchisees’ SBA loan applications are approved more frequently, will increase in importance as more banks look to it when evaluating franchise concepts.

Marquis Neal obtained an SBA loan to fund his i9 Sports franchise’s $50,000 startup costs but admits “It was tough.” With the help of his wife, Xanthe, who is an accountant, he was able to put together three-year projections, cash flow statements, and a comprehensive business plan. The upfront costs secured business management software, training, initial on-site help, and customized demographic study of the territory. In 2008, his youth sports youth league franchise enrolled more than 800 kids in flag football, cheerleading, and basketball programs in West Baltimore County, Maryland.

Harsh economic times often give birth to enduring companies, and franchises are no exception. “Franchise business leaders have confidence in the entrepreneurial spirit of their franchises and the fundamentals of the franchise business model,” Shay says. “When you buy a franchise, you purchase a proven system as well as training and marketing support, which may prove advantageous during a slowing economy.


This story originally appeared in the February 2009 issue of Black Enterprise magazine.